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Weak Sales of Text Ads at Yahoo; Shares Dip

Shares of Yahoo fell to their lowest level in nearly two years in after-hours trading yesterday as it reported weak revenue from Internet search advertising in the second quarter and a delay in a critical project that is meant to increase search revenue.

While Yahoo, which runs the world’s most popular Internet site, has a booming business selling graphical advertising, it has been struggling to rebuild its search service.

Google, which continues to increase its share of both users and advertising revenue, produces 40 percent more revenue from each search than Yahoo does, industry experts say, thanks to software that is better at selecting relevant text advertisements to place on a page of search results.

Terry Semel, Yahoo’s chief executive, told investors in a conference call yesterday afternoon that Project Panama, the company’s effort to match Google’s ad-selection technology, would be delayed by at least three months. Instead of being introduced this quarter, the new advertising system will not be switched on until at least the fourth quarter. The two-year-old project is already many months behind its original schedule.

“I didn’t want to take it to the market if it was not quite ready and not quite the quality it should be,” he said. “So I said to them, do the best job you can.”

Mr. Semel added that he was wary of changing the system that now accounts for the bulk of Yahoo’s revenue too close to the holiday shopping season, which is also the peak time for advertising. That raises the possibility that the company could wait until next year to switch to the new system, which analysts expect to produce more than $100 million in additional revenue each quarter.

Safa Rashtchy, an analyst with Piper Jaffray, said he was not satisfied with Yahoo’s explanation for the delays.

“I find it troubling,” he said. “I would much prefer if it were two quarters late and they could say it was this issue or that issue, rather than to give a nonanswer.”

After Yahoo’s results were released yesterday afternoon, the company’s shares fell to $27.80 in late trading, down 14 percent from the regular market close. They rose 40 cents earlier in the day.

Yahoo earned $164 million in the second quarter, ended June 30. It earned $755 million a year earlier, when its profits were bolstered by $552 million from the sale of Google stock and the settlement of a patent suit.

Mr. Semel said expenses were lower because Yahoo had not been able to hire as many people as it planned, and because it had delayed some advertising campaigns. That hiring and advertising spending, he said, was not cut but was pushed later into this year. Yahoo increased its employee count by 400, to 10,500 full-time workers.

Yahoo’s revenue from selling advertising and other marketing services was $1.39 billion, up 27 percent.

Mr. Rashtchy said he estimated that Yahoo’s revenue from search advertising actually fell in the quarter, to $521 million. That is a decline of 4 percent, instead of the 4 percent gain he expected. Sales of banners and other graphic advertisements, by contrast, increased by 36 percent, to $358 million, Mr. Rashtchy estimated, more than he expected. Yahoo does not provide breakdowns of those sales categories.

There were some signs that the growth of Yahoo’s vast audience had stopped. It reported 208 million registered users, the same level as three months ago, although still up 20 percent over last year. Its total users rose only 2 percent in the quarter, to 412 million. The company said the early summer was always a slow season for Internet usage.

The company maintained its predictions for revenue and operating cash flow for this year. It expects revenue, excluding traffic acquisition costs, of $4.6 billion to $4.85 billion, and it expects operating cash flow of $1.92 billion to $2.06 billion.

Jordan Rohan, an analyst with RBC Capital Markets, said that while Yahoo’s forecasts remained constant, investors were likely to scale back their expectations for the company.

“The low end of their range is now much more believable than the high end,” he said.

A version of this article appears in print on , on Page C1 of the New York edition with the headline: Weak Sales Of Text Ads At Yahoo; Shares Dip. Order Reprints|Today's Paper|Subscribe